Fitch Ratings has affirmed Chinese electric-vehicle (EV) battery producer Contemporary Amperex Technology Co., Limited's (CATL) Long-Term Issuer Default Rating (IDR) and senior unsecured rating of 'BBB+'.

The Outlook is Stable.

CATL's ratings reflect the company's strong global position in lithium-ion battery manufacturing, robust growth prospects, healthy operating cash flow and liquidity, as well as its net cash position.

CATL is expanding in China and internationally in response to surging global demand for its battery and energy-storage products. The required capacity expansion may limit its free cash flow (FCF) generation, but we believe it has a sturdy liquidity position and strong capital market access. CATL's heavy capex plan may weaken its net cash position, but the company has a strong order backlog, which provides visibility on investment returns. The company can also access the equity market to fund its expansion and improve its capital structure, including the proposed CNY58 billion equity placement it announced in August 2021.

Key Rating Drivers

Market Leadership: Fitch believes CATL is well positioned to maintain its global leadership in EV battery production, benefiting from strong growth prospects, high technology barriers and a diversified customer portfolio. CATL installed 34.1 gigawatt hours (GWh) of EV batteries 1H21, accounting for 30% of global installation. The company's strong market position is driven by its 50% market share in the large China EV market, which accounts for half of global EV shipments.

We expect CATL's revenue to rise at a CAGR of 39% in 2021-2024, capturing the industry growth, with strong order backlogs from domestic and foreign auto original equipment manufacturers (OEM).

Rapid Industry Growth: We forecast global EV battery installation to increase at a CAGR of 42% through to 2025, with EV penetration in China and, accordingly, the country's EV battery market, expanding at a CAGR of 43% to 400GWh by 2025. This would account for around half of worldwide shipments. Longer term battery demand is likely to be powered by on- and off-grid energy storage for renewable electricity and emerging applications, for example, to reduce carbon emissions from shipping and aviation industries.

High Raw Material Costs Constrain Margin: We expect CATL's operating EBITDA margin to remain at 18%-19% due to high raw material costs and pricing pressure. The company reported an operating EBITDA margin of 19.5% in 1H21 (2020: 22.5%), with the surge in EV-battery demand boosting raw material prices. However, battery suppliers, like CATL, face limited pricing pressure from OEMs due to rising demand. CATL is also investing along the value chain to secure raw materials and to secure direct customer access.

Heavy Capex: We forecast substantial capex at CATL to capture soaring end-market demand; the company spent more than CNY20 billion in 1H21, indicating an intensity ratio of 46% (2020: 26%) and is budgeting more than 500GWh of capacity by 2025, including at its China and overseas plants. As a result, we expect annual capex of CNY20 billion-45 billion in 2021-2024.

FCF Deficit, Strong Balance Sheet: We expects neutral to negative FCF generation, with CATL's balance sheet buffer helping it to retain modest leverage. The company held a net cash position of CNY34 billion in 1H21. This may be eroded by its large capex plan, as capacity ramp-up will take up to two years before production, but FFO net leverage should remain modest at 0.5x. The company plans an equity placement of CNY58 billion for its 137GWh battery capacity expansion. This will help sustain its net cash position, but we believe that even without the placement, its leverage would remain below 1x.

Working Capital Inflow: We forecast near-term working capital inflow from high customer prepayments, but for this to reverse to an outflow in 2022-2024 as the company scales up; we calculate a working capital inflow of CNY14 billion in 1H21 (2020: CNY5 billion inflow) relative to reported operating cash inflow of CNY26 billion. The outflow is likely to be caused by intensified competition as global capacity rises and advance payments fall, but the outflow should remain small compared with overall operating cash flow.

Diversified Customer Portfolio: CATL's technological advantages and capacity capability allow it to secure large supply contracts with major Chinese and foreign auto makers. Its investment in Germany could help it transform from a dominant regional player into a global supplier. Nevertheless, the company faces competition from international and domestic peers, including OEM-sponsored suppliers, which are also ramping up capacity. This could incite CATL to increase local production and accelerate capex on overseas capacity building.

Derivation Summary

CATL has a strong competitive position as one of the global leaders in lithium-ion battery production. We expect global battery demand from EV and energy storage applications to surge, while traditional auto suppliers, such as BorgWarner, Inc. (BBB+/Stable), which focuses on traditional automotive powertrain and drivetrain technologies, face more modest prospects.

CATL's scale by EBITDA is growing to be comparable to some of our largest rated auto suppliers, such as Compagnie Generale des Etablissements Michelin (A-/Stable), although CATL is less diversified geographically and has lower after-market exposure. However, CATL's leverage is much lower than that of global 'BBB' rated auto suppliers, including Aptiv PLC (BBB/Stable) and BorgWarner.

CATL has stronger technology leadership, market position and growth prospects than Chinese industrial companies, like Weichai Power Co., Ltd. (BBB+/Stable), and a financial profile that is comparable with that of 'A-' rated peers.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

2021-2024 revenue CAGR of 39%

2021-2024 EBITDA margin of between 18%-19%

2021-2024 annual capex of between CNY20 billion-46 billion

Dividend pay-out ratio of between 10%-15% in 2021-2024

Outbound annual investment of between CNY5 billion-15 billion

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

sustaining a market-leading position, with high EV market penetration in China or attaining a much larger operation scale, while sustaining positive FCF generation, or achieving meaningful international diversification.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FFO net leverage of above 1.0x for a sustained period

Significant and continued decline in Chinese market share

Decline in order backlog from global automakers

An unexpected drop in global production

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Market Access: CATL has comfortable liquidity, with an unrestricted cash balance of CNY67.0 billion and wealth management products of CNY2.2 billion. These were more than sufficient to cover its short-term debt obligations of CNY9.4 billion at end-June 2021. CATL maintains strong funding access to banking partners and capital markets. It issued CNY19.7 billion in equity and USD1.5 billion in offshore bonds in 2020 to support business expansion, and plans to further issue CNY58.2 billion worth of shares in 2H21.

Issuer Profile

CATL is a Chinese battery manufacturer with a leading position in domestic and international markets. The company's business scope includes manufacturing of lithium-ion batteries, energy storage systems and sales of lithium battery material.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Contemporary Amperex Technology Co., Limited	LT IDR	BBB+ 	Affirmed		BBB+

senior unsecured

LT	BBB+ 	Affirmed		BBB+

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